Why Corrupt Bankers Avoid Jail

Prosecution of white-collar crime is at a twenty-year low.

Federal prosecutions of white-collar crime are now at a twenty-year low.

Illustration by Eiko Ojala

In the summer of 2012, a subcommittee of the U.S. Senate released a report so brimming with international intrigue that it read like an airport paperback. Senate investigators had spent a year looking into the London-based banking group HSBC, and discovered that it was awash in skulduggery. According to the three-hundred-and-thirty-four-page report, the bank had laundered billions of dollars for Mexican drug cartels, and violated sanctions by covertly doing business with pariah states. HSBC had helped a Saudi bank with links to Al Qaeda transfer money into the United States. Mexico’s Sinaloa cartel, which is responsible for tens of thousands of murders, deposited so much drug money in the bank that the cartel designed special cash boxes to fit HSBC’s teller windows. On a law-enforcement wiretap, one drug lord extolled the bank as “the place to launder money.”

With four thousand offices in seventy countries and some forty million customers, HSBC is a sprawling organization. But, in the judgment of the Senate investigators, all this wrongdoing was too systemic to be a matter of mere negligence. Senator Carl Levin, who headed the investigation, declared, “This is something that people knew was going on at that bank.” Half a dozen HSBC executives were summoned to Capitol Hill for a ritual display of chastisement. Stuart Gulliver, the bank’s C.E.O., said that he was “profoundly sorry.” Another executive, who had been in charge of compliance, announced during his testimony that he would resign. Few observers would have described the banking sector as a hotbed of ethical compunction, but even by the jaundiced standards of the industry HSBC’s transgressions were extreme. Lanny Breuer, a senior official at the Department of Justice, promised that HSBC would be “held accountable.”

What Breuer delivered, however, was the sort of velvet accountability to which large banks have grown accustomed: no criminal charges were filed, and no executives or employees were prosecuted for trafficking in dirty money. Instead, HSBC pledged to clean up its institutional culture, and to pay a fine of nearly two billion dollars: a penalty that sounded hefty but was only the equivalent of four weeks’ profit for the bank. The U.S. criminal-justice system might be famously unyielding in its prosecution of retail drug crimes and terrorism, but a bank that facilitated such activity could get away with a rap on the knuckles. A headline in the Guardian tartly distilled the absurdity: “HSBC ‘Sorry’ for Aiding Mexican Drug Lords, Rogue States and Terrorists.”

In the years since the mortgage crisis of 2008, it has become common to observe that certain financial institutions and other large corporations may be “too big to jail.” The Financial Crisis Inquiry Commission, which investigated the causes of the meltdown, concluded that the mortgage-lending industry was rife with “predatory and fraudulent practices.” In 2011, Ray Brescia, a professor at Albany Law School who had studied foreclosure procedures, told Reuters, “I think it’s difficult to find a fraud of this size . . . in U.S. history.” Yet federal prosecutors filed no criminal indictments against major banks or senior bankers related to the mortgage crisis. Even when the authorities uncovered less esoteric, easier-to-prosecute crimes—such as those committed by HSBC—they routinely declined to press charges.

This regime, in which corporate executives have essentially been granted immunity, is relatively new. After the savings-and-loan crisis of the nineteen-eighties, prosecutors convicted nearly nine hundred people, and the chief executives of several banks went to jail. When Rudy Giuliani was the top federal prosecutor in the Southern District of New York, he liked to march financiers off the trading floor in handcuffs. If the rules applied to mobsters like Fat Tony Salerno, Giuliani once observed, they should apply “to big shots at Goldman Sachs, too.” As recently as 2006, when Enron imploded, such titans as Jeffrey Skilling and Kenneth Lay were convicted of conspiracy and fraud.

Something has changed in the past decade, however, and federal prosecutions of white-collar crime are now at a twenty-year low. As Jesse Eisinger, a reporter for ProPublica, explains in a new book, “The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives” (Simon & Schuster), a financial crisis has traditionally been followed by a legal crackdown, because a market contraction reveals all the wishful accounting and outright fraud that were hidden when the going was good. In Warren Buffett’s memorable formulation, “You only find out who is swimming naked when the tide goes out.” After the mortgage crisis, people in Washington and on Wall Street expected prosecutions. Eisinger reels off a list of potential candidates for criminal charges: Countrywide, Washington Mutual, Lehman Brothers, Citigroup, A.I.G., Bank of America, Merrill Lynch, Morgan Stanley. Although fines were paid, and the Financial Crisis Inquiry Commission referred dozens of cases to prosecutors, there were no indictments, no trials, no jail time. As Eisinger writes, “Passing on one investigation is understandable; passing on every single one starts to speak to something else.”

One morning in February, 1975, a fifty-three-year-old businessman named Eli Black took the elevator to the forty-fourth floor of the Pan Am Building, in Manhattan. When he was alone in his corner office, Black slammed his attaché case into one of the big windows overlooking the city until the glass broke. Then he jumped out. Black was the chairman of United Brands, a multibillion-dollar conglomerate. After his death, friends speculated that he had been working too hard, but an alert investigator at the Securities and Exchange Commission, Stanley Sporkin, grew suspicious, noting that people don’t just “drop out of windows for no reason.” Black, it emerged, had become embroiled in a bribery scheme. United Brands owned Chiquita, and in exchange for a reduction of the export tax on bananas Black had authorized a two-and-a-half-million-dollar bribe to the President of Honduras.

“White-collar crime,” in the definition of the sociologist who coined the term in the nineteen-thirties, is “committed by a person of respectability and high social status in the course of his occupation.” Eli Black fit the criteria. But he was dead. Sporkin, determined to secure justice, enlisted a young federal prosecutor in New York, Jed Rakoff, who devised a clever work-around: charge the whole company. Under U.S. law, it was technically possible to hold a company responsible for the actions of a single employee.

With their inventive legal minds and their tenacious pursuit of malefactors, Sporkin and Rakoff are two of the heroes in Eisinger’s deeply reported account. United Brands ended up pleading guilty to conspiracy and wire fraud, and though it got off with a token fine of fifteen thousand dollars, Congress later cited the case when it passed the Foreign Corrupt Practices Act, in 1977. Before the United Brands scandal, prosecutors tended to go after white-collar crimes by indicting the executives who committed them; now they charged the firms themselves. But the notion of prosecuting a corporation raises a number of tricky questions. A company, as an eighteenth-century British jurist once remarked, has “no soul to be damned, and no body to be kicked.” Corporations can own property, sue people and be sued, even assert First Amendment rights. But you can’t put a corporation in jail. So you impose a fine. The trouble is that the employees responsible don’t pay the fine: if the company is publicly traded, the shareholders do. These individuals may have benefitted from the felonious conduct if it inflated the value of their stock, but they are innocent of any crime.

The very conception of the modern corporation is that it limits individual liability. Yet, in the decades after the United Brands case, prosecutors often pursued both errant executives and the companies they worked for. When the investment firm Drexel Burnham Lambert was suspected of engaging in stock manipulation and insider trading, in the nineteen-eighties, prosecutors levelled charges not just against financiers at the firm, including Michael Milken, but also against the firm itself. (Drexel Burnham pleaded guilty, and eventually shut down.) After the immense fraud at Enron was exposed, federal authorities pursued its accounting company, Arthur Andersen, for helping to cook the books. Arthur Andersen executives, desperate to cover their tracks, deleted tens of thousands of e-mails and shredded documents by the ton. In 2002, Arthur Andersen was convicted of obstruction of justice, and lost its accounting license. The corporation, which had tens of thousands of employees, was effectively put out of business.

Eisinger describes the demise of Arthur Andersen as a turning point. Many lawyers, particularly in the well-financed realm of white-collar criminal defense, regarded the case as a flagrant instance of government overreach: the problem with convicting a company was that it could have “collateral consequences” that would be borne by employees, shareholders, and other innocent parties. “The Andersen case ushered in an era of prosecutorial timidity,” Eisinger writes. “Andersen had to die so that all other big corporations might live.”

With plenty of encouragement from high-end lobbyists, a new orthodoxy soon took hold that some corporations were so colossal—and so instrumental to the national economy—that even filing criminal charges against them would be reckless. In 2013, Eric Holder, then the Attorney General, acknowledged that decades of deregulation and mergers had left the U.S. economy heavily consolidated. It was therefore “difficult to prosecute” the major banks, because indictments could “have a negative impact on the national economy, perhaps even the world economy.”

Prosecutors came to rely instead on a type of deal, known as a deferred-prosecution agreement, in which the company would acknowledge wrongdoing, pay a fine, and pledge to improve its corporate culture. From 2002 to 2016, the Department of Justice entered into more than four hundred of these arrangements. Having spent a trillion dollars to bail out the banks in 2008 and 2009, the federal government may have been loath to jeopardize the fortunes of those banks by prosecuting them just a few years later.

But fears of collateral consequences also inhibited the administration of justice in more run-of-the-mill instances of criminal money laundering. Some officials in the Department of Justice wanted to indict HSBC, according to e-mails unearthed by a subsequent congressional investigation. But Britain’s Chancellor of the Exchequer warned U.S. authorities that a prosecution could lead to “very serious implications for financial and economic stability.” HSBC was granted a deferred-prosecution agreement.

Numerous explanations have been offered for the failure of the Obama Justice Department to hold the big banks accountable: corporate lobbying in Washington, appeals-court rulings that tightened the definitions of certain types of corporate crime, the redirecting of investigative resources after 9/11. But Eisinger homes in on a subtler factor: the professional psychology of élite federal prosecutors. “The Chickenshit Club” is about a specific vocational temperament. When James Comey took over as the U.S. Attorney for the Southern District of New York, in 2002, Eisinger tells us, he summoned his young prosecutors for a pep talk. For graduates of top law schools, a job as a federal prosecutor is a brass ring, and the Southern District of New York, which has jurisdiction over Wall Street, is the most selective office of them all. Addressing this ferociously competitive cohort, Comey asked, “Who here has never had an acquittal or a hung jury?” Several go-getters, proud of their unblemished records, raised their hands.

But Comey, with his trademark altar-boy probity, had a surprise for them. “You are members of what we like to call the Chickenshit Club,” he said.

Most people who go to law school are risk-averse types. With their unalloyed drive to excel, the élite young attorneys who ascend to the Southern District have a lifetime of good grades to show for it. Once they become prosecutors, they are invested with extraordinary powers. In a world of limited public resources and unlimited wrongdoing, prosecutors make decisions every day about who should be charged and tried, who should be allowed to plead, and who should be let go. This is the front line of criminal justice, and decisions are made unilaterally, with no review by a judge. Even in the American system of checks and balances, there are few fetters on a prosecutor’s discretion. A perfect record of convictions and guilty pleas might signal simply that you’re a crackerjack attorney. But, as Comey implied, it could also mean that you’re taking only those cases you’re sure you’ll win—the lawyerly equivalent of enrolling in a gut class for the easy A.

You might suppose that the glory of convicting a blue-chip C.E.O. would be irresistible. But taking such a case to trial entails serious risk. In contemporary corporations, the decision-making process is so diffuse that it can be difficult to establish criminal culpability beyond a reasonable doubt. In the United Brands case, Eli Black directly authorized the bribe, but these days the precise author of corporate wrongdoing is seldom so clear. Even after a provision in the Sarbanes-Oxley Act, of 2002, began requiring C.E.O.s and C.F.O.s to certify the accuracy of corporate financial reports, few executives were charged with violating the law, because the companies threw up a thicket of subcertifications to buffer accountability.

As Samuel Buell, who helped prosecute the Enron and Andersen cases and is now a law professor at Duke, points out in his recent book, “Capital Offenses: Business Crime and Punishment in America’s Corporate Age,” an executive’s claim that he believed he was following the rules often poses “a severe, even disabling, obstacle to prosecution.” That is doubly so in instances where the alleged crime is abstruse. Even the professionals who bought and sold the dodgy mortgage-backed instruments that led to the financial crisis often didn’t understand exactly how they worked. How do you explicate such transactions—and prove criminal intent—to a jury?

Even with an airtight case, going to trial is always a gamble. Lose a white-collar criminal trial and you become a symbol of prosecutorial overreach. You might even set back the cause of corporate accountability. Plus, you’ll have a ding on your record. Eisinger quotes one of Lanny Breuer’s deputies in Washington telling a prosecutor, “If you lose this case, Lanny will have egg on his face.” Such fears can deter the most ambitious and scrupulous of young attorneys.

The deferred-prosecution agreement, by contrast, is a sure thing. Companies will happily enter into such an agreement, and even pay an enormous fine, if it means avoiding prosecution. “That rewards laziness,” David Ogden, a Deputy Attorney General in the Obama Administration, tells Eisinger. “The department gets publicity, stats, and big money. But the enormous settlements may or may not reflect that they could actually prove the case.” When companies agree to pay fines for misconduct, the agreements they sign are often conspicuously stinting in details about what they did wrong. Many agreements acknowledge criminal conduct by the corporation but do not name a single executive or officer who was responsible. “The Justice Department argued that the large fines signaled just how tough it had been,” Eisinger writes. “But since these settlements lacked transparency, the public didn’t receive basic information about why the agreement had been reached, how the fine had been determined, what the scale of the wrongdoing was and which cases prosecutors never took up.” These pas de deux between prosecutors and corporate chieftains came to feel “stage-managed, rather than punitive.”

White-collar crime is not the only area in which prosecutors show reluctance to risk a trial. By the time Comey issued his Chickenshit Club admonition, a deeper shift in the administration of justice was already under way. Faced with the challenges of entrusting any criminal case to a jury, prosecutors were increasingly skipping trial altogether, negotiating a plea bargain instead. With the introduction of stiff sentencing guidelines, prosecutors routinely “up charged” crimes, requesting maximal prison sentences in the event of a conviction at trial.

Defendants can be risk-averse, too. Offered the choice between, say, pleading guilty and serving three to five years, or going to trial and serving ten if convicted, many opt for the former. But, as with corporate deferred-prosecution agreements, these arrangements grant prosecutors a victory without testing their evidence in court. Rachel Barkow, a law professor at N.Y.U., has pointed out that when you threaten defendants with Draconian sentences if they refuse to plead guilty “you penalize people who have the nerve to go to trial.” Some scholars argue that such prosecutorial bullying may violate the Sixth Amendment right to a trial by jury. (In 2014, a federal judge in Colorado declared that, for most Americans, this constitutional right is now “a myth.”)

The criminal trial is increasingly becoming a relic. More than ninety-five per cent of all criminal cases at both the state and the federal level are now resolved in plea bargains. A recent article in the Times described vacant courtrooms, out-of-work stenographers, and New York judges who can go a year or more without hearing a single criminal case. It may be no accident that the vanishing of the criminal trial has coincided with Eisinger’s story of vanishing corporate accountability. Presenting a case to a jury is a skill, and prosecutors now have fewer opportunities to hone it. The less adept you are in the courtroom, the more intimidated you will be by the prospect of going to trial, making you more likely to opt for a plea agreement instead.

This phenomenon has broader societal consequences. As John Pfaff demonstrates in his recent book, “Locked In,” one grave result of the tremendous leverage that prosecutors exert is the rise of mass incarceration. As judges and juries are written out of the criminal-justice equation, an awful paradox has emerged: the poor sign plea bargains and go to jail; the privileged sign deferred-prosecution agreements and avoid it.

This is a curious state of affairs, given that the notion of deferring criminal prosecution was originally introduced to benefit individuals, not corporations. During the nineteen-sixties, pilot programs in New York and Washington, D.C., demonstrated that when charges were suspended for ninety days, so that low-income defendants who had been arrested for nonviolent crimes could obtain counselling and job-placement services, offenders often turned their lives around to a point where the charges were dropped. This approach was both humane and efficient, in that it diverted people from the costly prison system. Among those who completed the program, few were arrested again. In 1974, following the success of such initiatives, the deferred-prosecution agreement was incorporated into federal law.

It is a pernicious irony that a progressive legal instrument designed to help working-class defendants stay out of jail has been repurposed as a vehicle for facilitating corporate impunity. As the federal judge Emmet Sullivan noted in 2015, “Drug conspiracy defendants are no less deserving of a second chance than bribery conspiracy defendants.” Yet these days the Department of Justice seldom offers this form of clemency to the kinds of individuals for whom the practice was conceived.

Perhaps, as Eric Holder has argued, there is simply more at stake when the defendant is a major bank. But what about the collateral consequences of showing less mercy when prosecuting low-income individuals? When you charge someone with a felony and send him to prison, the repercussions radiate outward, through his family and his community. Nearly three million American children have a parent in prison. According to the Rutgers criminologist Todd Clear, low-income neighborhoods in which a large proportion of the population cycles in and out of confinement experience greater familial dysfunction, warped labor markets, and a general lack of “mental and physical health.” Entire communities bear the brunt of our zealous approach to less rarefied varieties of crime. Prosecutors and judges seldom regard those collateral costs as a rationale for leniency.

One day in the nineteen-sixties, the economist Gary Becker was late for an appointment, and parked on the street illegally, rather than pay for a garage. Calculating the cost of a potential ticket against the likelihood that he would get one, Becker chose to take the risk. He didn’t get a ticket, and from that experience he extrapolated the insight that “criminal behavior is rational”: people who commit crimes often do so after weighing the relevant variables and deciding that the potential benefits outweigh the potential costs. Not everyone agrees with Becker’s thesis, but it holds a certain allure, because if crime is rational, then it should, at least in theory, be deterrable.

The failure to prosecute white-collar executives might be more justifiable if there were any indication that fines and deferred-prosecution agreements deterred corporate wrongdoing. The evidence, however, is not promising. Pfizer has been hit with three successive deferred-prosecution agreements, for illegal marketing, bribing doctors, and other crimes. On each occasion, the company paid a substantial fine and pledged to change—then returned to the same type of behavior. You might think that the price for flouting a deferred-prosecution agreement would be prosecution. But after offering Pfizer a second chance, only to have misconduct continue, the government was apparently happy to offer a third.

Jed Rakoff, the prosecutor who indicted United Brands, became a judge, and he has emerged as an outspoken critic of the prevailing approach to corporate crime. He has argued that companies may come to view even billion-dollar fines as a “cost of doing business.” In an article in The New York Review of Books, titled “The Financial Crisis: Why Have No High Level Executives Been Prosecuted?,” he highlights the farce of obliging a corporation to acknowledge criminal wrongdoing without identifying or prosecuting the managers who were responsible. Rakoff is dubious of obligatory promises from companies to change their corporate culture, and suspects that “sending a few guilty executives to prison for orchestrating corporate crimes might have a far greater effect.”

In recent years, the Department of Justice, sensitive to criticism of its kid-glove approach to corporations, did actually indict a string of banks, including Credit Suisse, BNP Paribas, J. P. Morgan, and Barclays. The banks pleaded guilty and, despite all the alarmism about “collateral consequences,” they all stayed in business, and there were no major shocks to the global economy.

In “Why They Do It: Inside the Mind of the White-Collar Criminal,” the Harvard Business School professor Eugene Soltes points out that, in the 2015-16 academic year, ten companies recruiting for new hires at Harvard had recently been convicted of a federal crime or entered into a deferred-prosecution agreement. By now, Soltes suggests, corporate deviance may have become so routine that even pleading guilty to a felony is no big deal. What had once been described as a badge of ignominy that could put a company out of business was now just a bit of unpleasantness: a passing hassle, like a parking ticket. ♦

This article appears in other versions of the July 31, 2017, issue, with the headline “Limited Liability.”

Patrick Radden Keefe, a staff writer, has been contributing to The New Yorker since 2006.